An SMSF, or self-managed super fund, is a private fund that is managed by an individual rather than an industry or retail super fund. This type of fund allows for complete control over investments and insurance, as the money is invested in the individual’s own SMSF. However, it’s important to note that managing an SMSF is a laborious and risky endeavor and should only be pursued with a full understanding of the associated responsibilities.
Setting up and managing an SMSF requires careful consideration of the risks and responsibilities involved. All members of the fund are personally responsible for complying with the law and making decisions for the fund, which can lead to potential losses if things go wrong. Investments may not bring expected returns, and members must continue to manage the fund even if their circumstances change. Relationship breakdowns, illness, or death of a member can also have negative consequences for the SMSF. Additionally, switching from an industry or retail super fund to an SMSF may result in a loss of insurance.
Acquiring an SMSF involves a significant investment of both time and money. Even with professional assistance, the setup process requires adequate time, as does the ongoing management of activities such as researching investments, staying up-to-date with superannuation and tax laws, creating and reviewing an investment strategy, maintaining accurate accounting records, and arranging for an annual audit from an approved SMSF auditor. According to the SMSF Investor Report from April 2021, the average SMSF trustee spends over eight hours a month managing their fund, which amounts to more than 100 hours annually.
Maintaining an SMSF can be expensive due to continuing expenses such as accounting, auditing, legal and financial advice, insurance premiums, and investment expenses. Although some of these costs may be tax-deductible, most will be out-of-pocket expenses for the SMSF.
When deciding to set up an SMSF, it’s important to consider suitability rather than just the starting balance. A lower starting balance may be appropriate if most of the administration can be managed and funds will be added later. Conversely, a higher starting balance may not be suitable if you are lacking the necessary skills, time, or experience to manage it. Active participation, understanding of responsibilities, goal alignment, and cost-effectiveness are all indicators that an SMSF may be appropriate.
The Australian Securities and Investments Commission (ASIC) has prepared case studies based on superannuation balance to determine if an SMSF is suitable. Indicators of suitability include willingness to actively participate in financial management, understanding of responsibilities, alignment with goals and objectives, and cost-effectiveness.
To set up an SMSF, it’s important to research investment options and check restrictions on investments. It’s also recommended to seek advice from a licensed financial adviser with specialist SMSF knowledge, who can help make informed decisions and understand the risks, costs, and compliance responsibilities. Financial advice should always include information about the potential benefits that may be lost and the skills, knowledge, and time commitment needed to manage the fund.
Proper structuring of the SMSF is important as it affects compliance responsibilities. Two structures are available for SMSF: individual trustees or a corporate trustee. However, it’s important to note that the Australian Taxation Office (ATO) regulate all SMSFs, and their website provides more information about the two obligations and how to set up the fund.
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